Over the past two years, many of my clients have been subjected to sales and use tax audits. Since states are broke, audits have become an important revenue generator. The hot spots have been fixed asset purchases, internet purchases and services. Generally speaking, the rule is if you don’t pay sales tax on a taxable purchase or service, you must remit use tax. Additionally, if your client’s applicable state rate is higher than the sales tax rate paid, the difference should be remitted as use tax. Unfortunately, CPA’s cannot oversee every transaction that their clients engage in, so there is almost always some type of exposure. Hence, the increase in audits.
So what advice should we provide to our clients to either head off an audit or minimize the exposure? First and foremost, file sales tax returns. Even if they file zero returns, start the statute to limit the years available for audit. With regard to their fixed assets, keep all fixed asset purchase invoices in a separate file. Auditors always want invoices for every fixed asset purchase in the audit period. I think it would be advisable to have your clients discuss their fixed asset purchases with you, maybe not all of them but large expenditures to determine if they are taxable and if use tax has to be remitted. Open lines of communication are your best defense against large assessments.
Also bring it to your client’s attention that the majority of internet purchases that they make will not have sales tax charged unless the vendor they are buying from has nexus in the state. Internet purchases always have to be scrutinized. Computer equipment and office supplies are frequently purchased over the internet without sales tax being charged.
Another area under scrutiny is the payment for services where the vendor did not charge sales tax. In a large number of states, services are subject to sales tax. For example, if your client has a cleaning service come in and that service is subject to tax, the cleaning service should be charging sales tax. If the cleaning service is not familiar with the law and does not charge sales tax, your client is liable.
One of the most difficult aspects of sales tax compliance is that it is state specific and transactional. Each state has the ability to tax transactions differently and this makes it extremely difficult to advise clients. The majority of my clients are multi-state, multi-jurisdictional and staying abreast of their sales tax exposure is daunting. I would advise every CPA to review the sales tax laws in your state, speak with clients about exposure and operate as if they will be selected for audit because chances are- they will.